Tuesday, February 7, 2012

Backwardation in Silver Continues to Demonstrate Extreme Physical Tightness

It's been awhile since we updated readers on silver's backwardation status.  Last summer while silver traded in extreme backwardation, we discussed that silver's extreme backwardation while gold remained firmly in contango was evidence of COMEX default risk in silver, rather than a risk of dollar devaluation (or else gold would have been just as firmly in backwardation as silver). 
On July 21st, the back month contract of Dec 15 was trading at a .65 discount to spot.
Fast forward 7 months (and 2 more cartel silver smashes) later. and silver remains in continual, unending backwardation. 
Silver currently first enters backwardation with the July 14 contract, with the back month (now Dec 16) still trading at an almost identical 0.60 discount to spot (February 2012).

After being smashed from $44 to $26, and clawing its way nearly back to $35, back-month backwardation in silver is nearly unchanged!

Throw the price volatility and the 30 million ounce increase in reported COMEX silver inventories out the window- backwardation in silver continues to tell the story of EXTREME PHYSICAL TIGHTNESS, AND RISK OF COMEX DEFAULT/ IRRELEVANCE!




Daily Settlements for Silver Futures (PRELIMINARY)Trade Date: 02/07/2012
Month



Change Settle Estimated
Volume
Prior Day
Open Interest
FEB 12



+.443 34.165 49 53
MAR 12



+.444 34.194 48,161 44,834
APR 12



+.445 34.225 6 3
MAY 12



+.447 34.258 11,637 18,438
JLY 12



+.448 34.309 1,977 7,005
SEP 12



+.450 34.342 - 3,657
DEC 12



+.451 34.383 188 14,058
JAN 13



+.451 34.383 - 9
MAR 13



+.451 34.383 11 1,396
MAY 13



+.451 34.379 - 1,088
JLY 13



+.451 34.373 - 3,252
SEP 13



+.451 34.339 - 180
DEC 13



+.451 34.290 - 8,339
JLY 14



+.451 34.153 - 814
DEC 14



+.451 34.063 42 1,437
JLY 15



+.451 33.914 - 227
DEC 15



+.451 33.809 - 606
JLY 16



+.451 33.665 - 38
DEC 16



+.451 33.565 - 4
Total





62,071 105,438


For readers new to the silver market, contango is a normal market condition, where a commodity's contracts typically are more expensive further out into the future, as the holder of the asset must account for storage fees, insurance, etc.  When a market is trading in backwardation, this means that future contracts are selling at a discount to the spot month, and indicates that there is either a distrust of the currency the commodity is priced in, (the US dollar in this case) or else there is a concern that the commodity will not be available when the contract comes due (exchange default concerns, etc).